Apartment investors have been warned to watch yields and vacancy rates, as rising prices push down ­Sydney returns and an oversupply leads to higher vacancies in Melbourne.

After a decade of under-building and little price growth, Sydney’s property market has been firing for the past 12 months. However price rises have led to rental yields softening.

“Flat rental growth means yields in Sydney have dropped below 4 per cent, which is not good news for investors," Australian Property Monitors senior economist
Andrew Wilson
said.

The spike in property confidence has also sparked record apartment approval numbers, but property ­pundits say demand still exceeds ­supply in Sydney.

The unit influx is allowing more ­buyers to access property closer to the city in a market where prices have risen more than 14 per cent over the past year.

Property group ICON launched a 161-apartment project in Waterloo, just over 4 kilometres from Sydney’s central business district on Saturday.

John Meagher
, managing director of selling agency 360 Property Group said 70 units sold. He said the majority of buyers in the $120 million project already lived within a 10 kilometre radius and planned to live in the units.

The RP Data price index shows the cost of Sydney apartments has out-paced median house prices in ­Melbourne. Sydney’s median unit price is $530,000, compared with $515,000 for a Melbourne home.

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“We knew the market was strong but this exceeded our expectations – the project is selling at a higher price point than the investor-targeted product that tends to sell out in one day," Mr Meagher said.

One-bedroom apartments in the project started at $550,000. Two-bedroom units, measuring from 72 square metres, started at $750,000 and three-bedroom 107 square metres apartments from $1.25 million.

Sydney’s rising house prices have encouraged more owner-occupiers into apartments and rental demand remains strong.

A 3 per cent vacancy rate is considered balanced. SQM Research figures showed Sydney’s CBD vacancy rate is 2.4 per cent, compared with 8 per cent in Melbourne’s CBD and 4.7 per cent in Docklands. An oversupply has been forecast in Melbourne since supply peaked in 2010-11. Now that ­completions are on the rise, vacancies are expected to increase around the CBD, Docklands and Southbank. Melbourne homebuyers proved picky on Saturday, while competition for Sydney property was still strong.

Almost 1100 homes were auctioned and preliminary RP Data figures showed the clearance rate was 67.9 per cent. In Sydney, 857 homes were ­auctioned and the clearance rate was 82.7 per cent.

Melbourne’s highest-selling home under the hammer was a Glyndon Road property in Camberwell for $3.43 million after bidding started at $1.9 million. Listed with Marshall White, the four-bedroom 1920s home was on a 1900 square metres block which attracted attention from ­developers. The highest sale was a ­seven-bedroom Toorak home which sold for more than $6 million, listed with RT Edgar agents Paul Pfeiffer and Mark Wridgeway.

Melbourne buyer’s agent Mal James said the $1 million-plus market had ­softened after the year started on a high.

“A-Grade properties still had plenty of bidders, and homes in Boroondara that are drawing strong Chinese ­interest did very well," he said.

“But overpriced B-graders and all the C-graders, the ones needing a big reno and where the price is not quite right, are not showing the same results."as they did just a few months ago."

Sydney’s highest seller was a Maroubra property for $3.01 million. The six-bedroom home was listed with Chris Ballard of Ballard Property.